VenEconomy Monthly has been breaking major economic and financial stories about Venezuela for nearly 25 years, and Dalmady has long been recognized as one of Venezuela’s and South Florida’s most respected and authoritative financial analysts.

Without saying so directly, Dalmady concludes that SIB, which reportedly is owned by the same Stanford Group which operates a commercial bank in Venezuela, could be a financial house of cards – the offshore investment banking equivalent of a balsa wood house on stilts in Hurricane Alley.

In his analysis for VenEconomy Monthly, Dalmady observes that “…2008 was an awful year for investing. The S&P had its worst performance since the great depression, falling 38%. Few investment categories weathered the storm. For stocks, corporate bonds, commodities, currencies and/or hedge funds, it was all pretty bad. (However), in a Nov. 28, 2008 note to its depositors, the Stanford International Bank acknowledged that it had performed poorly. But just “a little” poorly. They acknowledge a $110 million loss up until that date (a quarter of the equity). Doing a little math, that doesn’t mean that the bank’s investment portfolio lost money (like almost everyone). It means that they didn’t profit enough to get back to break even. Since the bank invests the money of its depositors and has to pay them interest plus the commissions to its affiliated advisors, it must earn at least 8-9% on its investments in order to compensate these costs. The bank is recognizing that in 2008, the year of the great crash in the markets, it “only” made a 5-6% return on its portfolio. Quite an act of contrition. The bank also affirms that it had no positions in Bernie Madoff’s funds. What a relief!”

“…to improve the bank’s financial standing,’”adds Dalmady, “the bank has issued $541 million in new capital, presumably out of Sir Allen’s bank account. This was for the peace of mind of the bank’s over 30,000 clients. But then, the 2007 audited statements affirm that bank had over 50,000 clients. Well, if it’s more than 50,000, it’s more than 30,000 also, right? Or maybe a few clients got lost.”

“Another little tidbit extracted from the Internet. Health Systems Solutions (HSSO) is a small ($8 million market cap) health technology company in which SIB reportedly has a 20% stake. In October 2008, HSSO offered to buy another company in the industry: Emageon Inc (EMAG) for $62 million. Emageon accepted and the deal was to close in December 2008 after EMAG’s stockholders approved it. SIB was supposed to fund the deal (we’re assuming taking an equity stake, since they do not provide loans by definition). SIB did not send the money when agreed and EMAG filed a complaint in Federal Court. The two parties (HSSO and EMAG) later reaffirmed their merger intent and agreed (on Dec. 29) to extend the closing deadline to Feb. 11. Because of SIB’s initial failure to fund, HSSO was required to put up additional escrow amounts and faces additional penalties if it fails to deliver again.”

Dalmady says SIB’s “failure to deliver those $62 million is a bit perplexing. According to its financial statements, the bank is extremely liquid. Even if the 2007 statements are a bit dated, at that time there was $627 million in cash and about 90% of its $7 billion portfolio was listed at a term of one month or less. Such liquidity is a constant in SIB’s financial statements over the years, so we must presume that this time the deal should close. We’ll be keeping an eye on it.”

Dalmady clearly thinks SIB is a troubled bank, a conclusion he reaches after applying what he calls the “duck theory” – if it “quacks” like a duck, if it walks like a duck and it has a bill like a duck…IT’S A DUCK!

Duck theory = common sense.

Dalmady asks, “What does a financial duck look like? Its traits are many and varied, but here are a few:”

What is being offered?

SIB offered (still offers) high interest rates on CD’s. Up until recently the rate was about 7.5% on a one-year deposit. That compares quite favorably with 4-5% that US banks were paying in the best case scenario, and recently rates have fallen below 3%. However, SIB’s rates have always been that high.

This has been an extremely successful strategy for the bank, at least as far as deposit growth is concerned. SIB’s deposits have grown from $624 million in 1999 to over $8.4 billion at year-end 2008 – an average compound growth rate of 34%!

“Now, that is unusual,” says Dalmady, noting that very aggressive deposit growth is usually a “red flag” for banks. It’s difficult to invest such a deluge of money efficiently. It also indicates that something may be “too attractive.”

How does the bank operate? What does it do with the money?

SIB operates on a quite unique business model. It basically takes deposits from investors all around the world mainly in the form of time deposits. But it doesn’t make loans (technically, a depositor can take out a loan with his/her own CD as collateral, but that’s all). It has practically no service revenue.

Only 75 people actually work for SIB on the island, but it captures deposits through a global network of independent affiliated “advisors” who receive commissions of 1.5% per annum for delivering deposits to the bank.
In order to make money, SIB invests in the capital markets – Stocks, Bonds, Hedge Funds, Precious Metals and Currencies. Those are really fascinating things that go up and down and deliver great profits sometimes, not so much on other occasions, and at times (not few, especially recently) go down in value as well.

You may be inclined to say: “lots of banks do that.” Not so, Dalmady writes. “The so-called ‘investment banks’ (of which there are few left) have several other businesses which generate revenue, such as underwriting, mergers and acquisitions, brokerage and asset management. Yes, they have trading divisions, but the fee-based businesses generate a stable flow of income that (usually) allows them to weather the ups and downs of the trading business.”

“Commercial or retail banks will also ‘invest’ money as part of their strategy,” adds Dalmady. “But these are usually arbitrage situations. For example, if a bank can receive deposits from the public at 2% and use them to buy government paper with a 4% yield and a similar maturity, it is a low risk strategy which banks will execute quite gladly. But that’s not their main business. Normally banks will pay little, charge a lot, and still have a hard time making money on the margin. They make their profits with service charges.”

But according to SIB’s financial statements, as of the end of 2007 SIB was 42% invested in stocks, 20% in fixed income (bonds), 25% in hedge funds and 13% in precious metals. That is a relatively typical allocation for this bank and over the last few years it has gone from a low of 27% in stocks (2004) to a high of 60% in 2006.

Nothing to see here, right? How about this?

The return on SIB’s portfolio over the last years: 2003: 14.4%, 2004: 11.5%, 2005: 10.3%, 2006: 11.0%, 2007: 11.4%. Can you see a pattern emerging? One of consistency. Not good!

Considering only the stock portfolio, the returns were: 2004: 8.2%, 2005: 8.8%, 2006: 11.7%, 2007: 8.2%. Nothing out of the ordinary, right? But consider the returns on the S&P 500 the same years: 2004: 9%, 2005: 3%, 2006: 12,8%, 2007: 3,8% (we’ll talk about 2008 later). The bank did quite a bit better than average.

As for other categories, they report a 22% average annual profit on their hedge funds and 12% on precious metals. Not bad at all.

This could seem quite “normal” for someone who is not in the investment world, but these performance figures are very, very good. The last few years have been incredibly challenging for investing in most of these categories. In the ‘80s or ´90s, returns of this magnitude could be considered “normal.”

Since 2000, however, SIB is at the “limit of the credible universe.”

“I really would like to know which stocks, bonds, funds and metals these folks have invested in to achieve such returns,” says Dalmady. “Unfortunately, that is something they don’t reveal. As an investor, I love to ‘toot my own horn’ when I get something right. The bank doesn’t. One could argue that their portfolio is made up of private companies, not publicly traded ones. There is some of that in the group of companies mentioned to be associated with the bank, but it’s not clear if those positions are in this portfolio. Anyway, that private equity portfolio includes stock in a resort developer, three motion pictures, a golf club manufacturer, a golf course, an auction house and a restaurant in Memphis. These are small companies which could not represent a large portion of the bank’s assets and frankly looking at their nature, look more to be a millionaire’s ‘toys’ than investments.”

Dalmady continues: “Even if everything that SIB publishes and states is 100% true (apologies to Heisenberg), a “depositor” at SIB is effectively lending it money so the bank can then go out and play the markets with that money (the bank has $16 in deposits for each dollar of equity). That fact alone is somewhat unsettling. Fortunately, the bank has consistently achieved above-average results in all its investment categories. That is, SIB has done what few (or no) others can.”

Who manages and controls this animal?

SIB has 75 employees on Antigua, but a small group manages the bank. There is mention of an investment committee, but the members of the committee are not named. A few years ago there was an actual investment manager or VP; now the position appears to be vacant. There is one board member, an 85-year-old cattle rancher and used car dealership owner who has the title of “Investments,” so one can presume that he advises some about that.

The management team and board has basically been the same for many years.

There is no mention of any special investment technology or strategy that can account for the results obtained so far. That is, unless you count “long-term, hands-on and globally diversified” as a strategy and not just a catch phrase. An $8 billion portfolio is not easy to manage, at least not efficiently (to which the Barings and Société Général traders can attest).

“Without further information, we must assume that SIB’s administrators are extraordinary beings,” Dalmady reasons.

What about the stockholders?

There is only one. He has the title of Chairman of the Board and doesn’t appear to have management responsibilities at the bank.

Auditors?

Well, yes, the financial statements of the bank are audited. The auditor is a local (island) firm. The principal is a 72-year-old gentleman who has been auditing the bank for many years (at least ten). PriceWaterhouseCoopers and KPMG have offices on the island, and it is a good internal control practice to change auditors every few years, but the bank prefers to stick with its trusted firm.

Antigua’s banking authorities supervise SIB, which does not take institutional deposits or deposits from other banks. This is not necessarily a bad thing, but corporate depositors would be expected to do some due diligence on the bank before committing their money.

So why hasn’t anyone noticed or said anything?

“There isn’t really an interest in drawing attention to this case,” says Dalmady. “The depositors are not likely to suspect and much less say anything. Does anyone really read those financial statements that are lying around in bank offices? The local authorities prefer to leave these people alone. If the bank goes elsewhere, who is going to build schools and maintain the roads and gardens? The bank plays an important social role on the island.”

“The depositors are people from around the world, but perhaps not enough from one place in particular to arouse the interest of a regulatory agency. It is out of their jurisdiction anyway. SIB’s owner is a powerful man. A ‘Forbes list’ billionaire. Any unsubstantiated suspicion could have legal consequences for the denouncer. Perhaps the nature of this beast is a well-known secret. Many think it’s strange, but no one wants to say anything,” says Dalmady.

But he caveats: “…we have been saying that the animal certainly looks like a duck. True to Heisenberg, we must be willing to admit that it may not be a duck, if better evidence indicates that it is not. What would be better evidence in this case? How about a complete audit by a more familiar name such as KPMG? Or maybe a statement by the bank’s global custodian, a Credit Suisse or a Morgan Stanley, affirming… ‘yeah these guys have $8 billion worth of securities in custody with us?’ That would be nice. A DNA test very difficult to refute, if you will.”

3 Responses to Stanford International Bank: Antigua’s Bernie Madoff?

The auditor who has been auditing the Stanford Group of companies has recently past away. And as you rightfully noticed the size and reputation of this company can be in no way compared to one KPMG or a PWC who have to live up to their reputation. The Audit firm does not posseses the manpower nor the knowhow. It also need to be questioned what role the regulatory body play or is playing. Further insight in the relationship of the person in charge and the CFO of the Stanford Group would raise eyebrows. One arm of the group SDCL has recently been faced with lay off of staff with out pay. This has brought hardship on many families whose households are now on the breadline. As reason for the lay off staff were told that this was a result to the global housing market, however was not involve in this market. But one can chose which one of its marbles he wants to pickup and stop playing. The company was never setup to do business outside of the group and to make a profit. Strange model. It always looked as if there was a buttomless pit of cash. The reality now is therefore very hard to consume.

Strange we had $20M to give away in cricket match prize in November and two months later we cannot pay subcontractors for work done. If it “quacks” like a duck, if it walks like a duck and it has a bill like a duck…IT’S A DUCK!